![]() ![]() ![]() But, for this one transaction, before any other deductions, we have a perfectly matched revenue and expense picture. Of course, that’s not really our profit because we still have to pay rent on the store, insurance, our employees’ wages, and other expenses. In addition, we recorded an expense called Cost of Goods Sold that represents the one bat sold, and offsets the $15 in revenue, showing us we made a profit of $5 on that one bat. If we look at the physical inventory right after that sale, there are 9 bats left that cost $10 each, so the $90 in the accounting records for Inventory is spot on. This is one of the most direct examples of the matching principles you will ever use. Under the matching principle, we record the expense when we recognize the revenue from the bats. In addition, one $10 bat left the store in the hands of a happy customer, so inventory decreased by $10 and we recorded a corresponding expense that offsets the $15 revenue (b). The sale increased the businesses checking account by $15, so we debited checking and credited Sales Revenue (a). Instead, as the sporting good store’s accountants, we’ll just use T accounts to describe the entry: We won’t write the journal entry for this transaction. He places three bats on display right inside the front door in a nice rack with some other wooden and aluminum bats, and he puts the other seven in the back storage area. Purchases in Current Period The cost of purchases made during the current period. Beginning Inventory The amount of inventory rolled over (i.e. He just spent $100 on inventory (probably on account, so he now owes AshBats $100). Cost of Goods Sold (COGS) Beginning Inventory + Purchases in the Current Period Ending Inventory. ![]() He buys 10 baseball bats from his supplier, AshBats, Inc. Let’s say Chan Ming owns a sporting goods store. It is an asset: something we own that will produce future revenue. It means when we buy inventory, and it is sitting on the lot, lying on the shelf, or hanging on a rack, it is not an expense.Īgain, inventory is not recorded as an expense when we buy it from the wholesaler or distributor. Remember, under accrual basis accounting, we recognize revenue as it is earned and expenses as they are incurred in order to match those expenses with the revenue. Describe cost of goods sold in relation to the matching principle. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |